Macquarie: UK economy entering a ‘new era’, regardless of Brexit

Bad weather ahead for the
UK economy?
REUTERS/Eddie
Keogh

• Brexit is pretty much the only game in town for
  watchers of the UK economy right now.
• But away from the UK’s exit from the EU, Macquarie said
  a worrying new dynamic is forming in the economy.
• Supply-side limits on the economy, like the tight
  labour market, are likely to start having a negative
  impact.
• Macquarie calls it a “new era” for the British
  economy.

In the 816 days since Britain voted to leave the European Union,
Brexit has been pretty much the only game in town for watchers of
the UK economy.

But there’s a deeper change going on beyond Brexit related
uncertainties. Analysts at investment bank Macquarie this week
described what they call the beginning of a “new era” in the
British economy.

Analyst Matthew Turner thinks low wage growth and full employment
means the economy will struggle to grow in future unless it can
crack the persistent problem of productivity.

“UK economic performance over last decade [has been] driven by
greater resource utilisation on the back of strong population and
employment growth,” analyst Matthew Turner wrote in a
presentation titled: “A new era, even without Brexit.”

“That is now changing as supply-side limits bite, and how
efficiently resources can be used will determine whether relative
strong growth can be maintained.”

Turner’s argument is that rising employment and demographic
strength allowed the UK to boom in the years since the worst
effects of the financial crisis wore off. But that story is now
coming to an end. Economic strength could suffer as a result.

Unemployment in Britain is pretty much as low as it can go,
at just 4%. Employment growth boomed as unemployment fell, but
growth is slowing. Meanwhile, wage growth is meagre, which
creates a worrying economic disconnect.

“Rising nominal wages [is] needed to offset [the] expected fall
in employment growth for aggregate spending to be maintained,”
Turner said, noting that such a change ultimately needs higher
productivity.

“At the aggregate level, this is reinforced by rapidly
disappearing labour slack, meaning total household incomes cannot
be boosted much more by rising employment, a key factor in the
mid-2010s.”

At its simplest, Turner is effectively arguing that the number of
people in employed in the UK is pretty much at a peak, meaning it
will now struggle to create meaningful growth through simply
adding more workers. Instead, it will need to improve
productivity and output per person. There is currently little
evidence of this materialising.

A key engine of growth is consumer spending. With low
productivity persisting, and wage growth only increasing slowly,
it is possible that household incomes could struggle going
forward. This would likely be a major downside for UK growth as a
whole.

Brexit will continue to dominate the economic story in the coming
months, with forecasts of weaker growth once a deal is
secured, or a major slowdown in the event of a no deal Brexit.
But Macquarie’s analysis reminds us that there’s more going on in
the economy than just the UK’s exit from the EU.

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